Rural

20 January 2016, by Ian Bailey

Farming offers up many routes for investment, whether it be in the US’s Corn Belt, emerging markets in central Europe, or Africa for those who are willing to roll the dice.

 
 

Core Plus tip: USA Corn Belt – Long term

The Corn Belt is ideal for the private or smaller scale investor. It offers scale and the ability to aggregate land investments to create large farming units focusing on corn and soybean production. The states of Illinois, Indiana and Ohio present the best opportunities. The Corn Belt benefits from the class A soils and relatively little climatic volatility that is typical of the US Midwest.

The best opportunities lie in identifying under performing farms. Long term gains in asset performance can be achieved by increasing crop yields using technology such as hybrid seeds and highly mechanised production. This productivity gain over time is capitalised into the land value despite short to medium term commodity price volatility.

Figure 1 below shows a real example of what can be achieved where the result was a 15-year average annual capital growth rate of 8.4% and income return of 3% per annum. The recent performance of the past five year both in terms of capital growth and income return of 15.4 % and 3.7% respectively per annum clearly shows the benefits of the productivity gains.

FIGURE 1

Global Land Values

 
Figure 1

Source: Savills Research using Eurostat & various data/estimates

Value Add tip: UK Rural Estates – Long term

A diversity of assets (agricultural, residential, commercial and, more recently, renewable energy) helps to spread risk and high-quality rural estates with a range of assets all within one property fit this bill. Savills Estate Benchmarking Survey, which has surveyed rural estates across the UK since 1996, shows they have delivered a steady upward performance in both gross and net incomes with has a reduced exposure to commodity price volatility.

UK properties are an attractive proposition to high net worth individuals as they are safe shelters for wealth and are a tax efficient means of transferring wealth from one generation to the next. In addition, they offer a range of ownership benefits, from residential to sporting, and the long term investment performance of rural estates is comparable to most alternative assets with an annualised total return of 10% over the past 30 years. The economic outlook for rural estates remains positive despite weaker short–term agricultural prospects.

Opportunistic tip: Central European Farms – Long term

Achieving top performance of the farming operation and adding value along the supply chain is key to maximising investment returns. This is especially so in the emerging markets, including Central Europe, where farming businesses have been inefficient (small and fragmented) and under resourced (capital and skills). However, many of these regions have significant resources in terms of land, water and labour. Agriculture in the EU also benefit from subsidies. If farming operations can achieve the scale and adequate resources to perform in the top quartile, then this increase in performance will translate into stronger capital values.

Farmland values in the emerging markets have, historically, shown the strongest capital growth. Although the current fall in commodity prices will lead to some pressure on average farmland values in the short term, we believe that the right product in the right place can offer real opportunities for top long-term investment performance, underpinned by the fundamentals of food and energy security.

Opportunistic tip: Agricultural investment in selected African Countries – Long term

Africa continues to grow in economic significance and is widely recognised as playing an increasingly important role in the global economy. Agriculture and, more specifically, land are Africa’s greatest assets.

Africa is often seen as a homogenous region. However, there are significant ‘growth corridors’ developing in southern and eastern Africa that not only unlock the potential for export for investors but also significantly strengthen local and regional markets.

The land tenure system and regulations vary for each country, but it is generally based on a long leasehold interest of between 50 and 99 years, often with a renewable clause written in to allow effective ownership in perpetuity.

Africa offers a significant agricultural investment market but is not for the faint hearted. As ever, it is vital to be focused and ‘know your market’. The risks can be substantial but for the well informed there is an opportunity to acquire large productive farms that are likely to significantly increase in capital value over time.

Performance will depend on the enterprise and location, and the level of capital required to develop the farm to full operational capacity. External infrastructure and access to markets are key to maximise financial returns so this may be an investment best made alongside infrastructure investments or improvements.

MAP 1

Emerging markets: Location relative to the main highway is key to transport feasibility and cost. The further away from the main highway, the weaker the infrastructure and the higher the cost

 
Map 1

Source: Savills Research and publicly available data

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Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

Yolande Barnes

Yolande Barnes

Director
World Research

Savills Margaret Street

+44 (0) 20 7409 8899

 

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